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11/26/2006

On Raising the Federal Minimum Wage--BECKER

An increase in the minimum wage has several distinctive negative effects on the economy. While the wages of some low skilled workers would improve, it would reduce employment opportunities for teenagers and other lower skilled workers. They are pushed either into unemployment or the underground economy. A bigger minimum also raises prices of fast foods and other goods produced with large inputs of unskilled labor. Workers who receive on the job training must accept lower wages in return. A higher floor on wages prevents the wages of lower skilled workers from being reduced much, and hence discourages firms from providing much training to these employees.
A rise in the minimum wage increases the demand for workers with greater skills because it reduces competition from low-skilled workers. This is an important reason why unions have always been strong supporters of high minimum wages because these reduce the competition faced by union members from the largely non-union workers who receive low wages.
Most knowledgeable supporters of a higher minimum wage do not believe it is an effective way to reduce the poverty rate. Poorer workers who are lucky enough to retain their jobs at a higher wage obviously do better, but the poorer workers who are priced out of the above ground economy are made worse off. Moreover, many of those who receive higher wages are not poor, but are teenagers and other secondary workers in middle class and rather rich families. Poor families are also disproportionately hurt by the rise in the cost of fast foods and other goods produced with the higher priced low-skilled labor since these families spend a relatively large fraction of their incomes on such goods.
A recent petition by over 600 economists, including 5 Nobel Laureates in Economics, advocated a phased-in rise in the federal minimum wage to a much higher $7.25 per hour from the present $5.15 per hour. This petition received much attention, and the number of economists signing is impressive (and depressing). Still, the American Economic Association has over 20,000 members, and I suspect that a clear majority of these members would have refused to sign that petition if they had been asked. They believe, as I do, that the negative effects of a higher minimum wage would outweigh any positive effects. That is one reason I would surmise why only a fraction of the 35 living economists who received the Nobel Prize signed on to the petition--I believe all were asked to sign.
Controversy remains in the United States (and elsewhere) over the effects of the minimum wage mainly because past changes in the U.S. minimum wage have usually been too small to have large and easily detectable general effects on employment and unemployment. The effects of an increase to $7.25 per hour in the federal minimum wage that many Democrats in Congress are proposing would be large enough to be easily seen in the data. It would be a nice experiment from a strictly scientific point of view, for it would help resolve the controversy over whether the effects of large increases in the minimum wage would be clearly visible in data on employment, training, and some prices. Presumably, even the economists and others who are proposing this much higher minimum must believe that at some point a still higher minimum would cause too much harm. Otherwise, why not propose $10 or $15 per hour, or an even higher figure? I am confident that for this and other reasons, the actual immediate increase in the federal minimum wage is likely to be significantly lower than $2.10 per hour.
A number of countries, including France, have already initiated this experiment, for the ratio of the minimum wage to the average wage in these countries is much higher than in the United States. The effects of the French minimum have been carefully studied by two excellent economists, Guy Laroque and Bernard Salanie, in a series of articles, such as " Labor Market Institutions and Employment in France," Journal of Applied Econometrics, 2002. They find that the relatively high minimum in France explains a significant part of the low employment rate of married women in France. Salanie has also argued that the high French minimum wage is important in explaining the dismal employment prospects of young persons in France, and the huge unemployment rate of Muslim youths there, estimated to be about 40 per cent.

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